Media and Technology

Tuesday 2 October 2012

Conflicts of interest: keeping the members of the Artist’s

“Conflict of interest, you’re split right in twoYour convictions lie between your shadow and youWhen I need your help and I’m heading your wayBoth of your halves turn the same shade of greyConflict of interest“1

Introduction

The economic downturn continues. Digital distribution of sound recordings – both legal and unauthorised – has forever altered the revenue models of the record business. The advances from plentiful, large scale record and publishing deals that were once used as the basis for cash-flowing the early years of an artist’s career have diminished to a trickle. The desire of record companies to preserve their hegemony over the music industry has led them to attempt to divert to themselves others of an artist’s revenue conduits. As a consequence, the funds that were once available to adequately cover the cost of professional advice and properly remunerate other members of an artist’s team during the early stages of his career may now be required to cover an artist’s more basic needs.

Budgets thus tightened, many artists and their teams increasingly need to make do and mend, particularly at the lower end of the musical food chain. The new age of austerity affects not only the way artists go about exploiting their talent, but also how they might best navigate their way through the numerous contractual and commercial currents that often threaten to cross each other and drown the artist in small print. It is when that threat becomes real that the possibility of conflicts between an artist’s team members increases.

The Artist’s team
Starting XI

Artist/Individual Band Members

Manager Lawyer Accountant Agent

PR Consultant Promoter Producer

Record company Publisher Merchandiser

Subs

Royalty auditor; Overseas lawyer; Backing Musician; Road crew

What is a conflict of interest?

A conflict of interest will arise in circumstances where:

Party A has an obligation or a responsibility to Party B, whether by way of contract or as a consequence of a fiduciary or other relationship, and

Party A is confronted with a choice to pursue a course of action or to do something that is contrary to the best interest of Party B, and

The course of action to be pursued will involve Party A benefiting or preferring his interest or that of a third party to that of Party B.

What are the interests of the Artist and the team members that require to be kept separate?

The primary obligation of each of the members of an artist’s team is to facilitate the ability of an artist to realise his creative vision and to enable him to exploit the fruit of his talent on the best available commercialterms. In discharging their respective obligations, the team members should at aTItimes maintain their-own prpfessionalism while respecting the integrity of the artist’s work. When one of the artist’s advisers permits a conflict of interest to dictate the course he plots for the artist, not only may he compromise the artist creatively and commercially, but he may also erode his own credibility both with the artist and those with whom he has engaged on the artist’s behalf. Conflicts may, and often do, create negative financial consequences not only for those who actively pursue a course in the face of that conflict, but also for those who are affected by it.

Why do conflicts of interest arise?

Conflicts may arise, not only in relation to the business of a musical artist, but in other businesses, for a number of causes.

The causes of conflict are largely prosaic and include: greed, naivety, ignorance, inexperience, ego, money – or the lack of it, the ceding of too much control and accountability by one party to another, dishonesty or even, more simply, where there is a difference of opinion. On a more esoteric level there may be creative differences between individual band members or simply a disagreement as to the direction in which the artist’s career should be going. Sometimes two or more of these causes overlap.

As a general statement, conflicts may be explained by one party, often an adviser, simply losing perspective and getting too close to a situation to retain objectivity.

How may conflicts arise at a practical level?

With so many involved in an artist’s career, the matrix of relationships within which a conflict may occur is inevitably complex. By considering some examples, the way in which the potential for conflict arises will also be appreciated and solutions for avoidance will become apparent.

Greed

Record companies with their so-called 360 degree deals provide a fertile breeding ground for conflicts. In an era when the major record companies are evolvinginto self-styled entertainment ompanies/ inevitably they engage in spheres of activity that are outside the primary areas of their expertise. While they are bulking up with specialists and making acquisitions of niche players to provide that expertise/ whether it be in agency or merchandise or something else/ the potential for conflicts multiplies.

The record companies’ need to recoup albeit diminishing levels of advances now dictate their demands to grab income from live performances/ merchandise and even publishing. In taking a position in relation to the receipt/ control and even by dictating the terms on which these other income streams may be earned by artists/ conflicts arise. In the endeavour to sell records, for example/ giving away merchandise over which a record company has acqUired control/ may not be in the best interest of an artist/ either by shrinking the artist’s merchandising income or by eroding the real value at which his records may be sold.

An experienced manager and the artist’s lawyer need to use the best of their skills to guide an artist through the mire of the negotiations with record companies and other exploiters of talent who may now endeavour to take a share of the income streams that ought properly be the artist’s.

Money …

A manager may be tempted to persuade an artist to take a deal for more money from a record company that the manager knows is not necessarily the most appropriate for the artist thereby increasing the manager’s commission at the expense of the artist’s creative integrity.

… or the lack of it

Conflicts may arise where there is insufficient money to enable each of those involved in making a deal happen to derive the amount of income from that deal which he/she thinks he/she deserves. Thus/ putting their own interests ahead of those of the artist/ a producer might cut corners in the production process/ a lawyer may be tempted to skim read a contract and not review it thoroughly.

Ignorance

Parties doing what they are neither best at/ nor even qualified to do/ create the possibility for conflicts: what is otherwise known as ‘dabbling’. One example is where a manager might make do without an independent accountant to look after the artist’s money. Unlike accountants and lawyers who are governed by extensive statutory regUlations, there are little in the way of formal codes of conduct for managers and no designated statutory framework to which managers are legally subject. In particular/ both lawyers and accountants/ certainly in the UK and in other leading jurisdictions/ are subject to extremely onerous obligations with regard to keeping client’s money in separately designated client or trust accounts.

The temptation for the unwary manager is to pay all monies received into a single bank account from which expenses for all his artists are disbursed as well as his own running costs. Separate internal ledgers may be operated/ though numerous situations arise where even this basic precaution has not been taken by managers. Failure to keep individual artists/ funds separate from each other and from the manager/s own funds is a recipe for problems and, unintentionally or otherwise/ exacerbates the· potential for the money of one artist being used to cover the expenses of another or for the manager/s own requirements.

At the time of writing, ‘the Music Managers’ Forum in the UK is said to be in the process of drafting a code which is due to have been completed by the end of 2011. There is currently no similar organisation in the United States. Codes 0t practice for each of the Australian 2 and South African 3 Music Managers’ Fora are in force. Each provides that managers must ensure that all monetary transactions made on behalf of or in the interest of the client and all books of account and records must always be reasonably open for the inspection of the artist or their appointed representative. However, only the Australian code provides that a ‘Manager must ensure that all monies (income and expenditure) due to the artist are managed completely separately to the private assets of the manager. ‘

Operating at the fulcrum of the artist’s operation, the manager is vested with a high degree of trust and responsibility. A manager is ideally placed to police the interests of the various other team members, many or even all of whom, he may have brought into the team. That being so, it is crucial that a manager should be seen to be operating at the highest ethical level.

Differences of opinion

Differences of opinion as to what is actually in the best interests oft:he artist may arise between those notionally on the same side. Such differences may include:

a clash between’ medium and long term career objectives with short term financial gains or opportunities for media exposure;

different members of a band haVing different agendas in situations where, for example, the publishing income is not shared equally or where those who write take a view about performing less often than those who don’t and who consequently have a greater need for live income.

Protecting a relationship with a referrer of business

Examples of managers referring lawyers or accountants to artists, or lawyers introducing writers to publishers or record companies and any other permutation of referral and introductions amongst an artist’s team is almost inevitable. In any industry that thrives on relationships and depends on insiders’ knowledge about who does what best, cross~referral is inevitable. Indeed, cross-referrals and the relationships from which they arise are the heartbeat of the industry.

Nevertheless, once a relationship is defined and whether or not it is regulated by a contract or relies on an implicit duty of good faith, the proper boundaries of such a relationship must be respected. Thus if a lawyer who has been referred an artist by a record company discerns that the terms of the deal offered by that company are so unreasonable that make it commercially unacceptable to the client, he must say so, eVen at the risk of damaging his relationship with the record company. For a lawyer to do otherwise will mean not only putting his own interest ahead of that of the artist but also, arguably, acting negligently as well.

An adviser simply losing perspective

Perhaps the most obvious example of an adviser who may lose perspective is the lawyer who acts on a purely contingent fee basis, either in litigation or, more obviously, in shopping and then negotiating a deal. In situations where a lawyer’s firm may measure his evenue value by reference to the number of hours that he can turn into billable fees, time spent on contingency work may not be so easily rewarded. Thus there may be situations that arise where a lawyer is desperate to close a deal for an artist with a record company in circumstances where the contract terms are less than ideal and where the negotiations may have taken up many otherwise chargeable hours of the lawyer’s time. Unless the deal closes – on more or less any terms, the lawyer is going to have to write off time. In such circumstances the terms of that deal could end up by not being the artist’s best interests.

Professional rules of bar associations around the world forbid their member lawyers from acting in conflicts of interest. English solicitors are not permitted to act on a purely contingent basis in litigation; there are also strict regulations that prevent fee-sharing. In any event, The Solicitors’ Code 4 forbids a solicitor from acting if there is a conflict of interest. A conflict is defined to include where a matter conflicts, or there is a significant risk that it may conflict, with a solicitor’s own interests in relation to that or a related matter. For the purpose of the rule, a related matter will always include any other matter which involves the same asset or liability.

In other words, the purely conTingent fee for shopping a deal provides a stark example of something that is arguably forbidden by the Solicitor’s Code as creating a conflict of interest.

While not specifically addressing conflict, a related matter arises under the New York General Business Law 5. Rules provide that anyone who procures or assists in the procuring of ’employment or engagements’ is an employment agency and, as such, must be licensed by the state or, in New York City by the NYC Department of Consumer Affairs. Recent opinions suggest that a lawyer who shops for a record deal must comply with the statute which requires the obtaining of a licence which, in turn, requires the posting of a bond. Under this statute the fees of a duly registered lawyer or manager are capped at 10% of the amount secured under the terms of the deal. Does a lawyer who fails to comply with this statute and who then seeks to charge more than 10% on a contingency deal therefore act ina conflict by so doing?

Lawyers representing both artist and manager

A lawyer who represents both the artist and the manager in relation to the same deal walks along a tightrope stretched over a chasm of potential conflicts and not just by virtue of the manager or the lawyer potentially losing perspective.

A manager may introduce his lawyer to an artist. Irrespective that the artist may have separate representation on the negotiation of the management agreement itself, the manager then instructs his lawyer (and not the artist’s independent lawyer) to handle the record and publishing deals. With an artist generally happy to let the manager liaise directly on legal issues, the danger for the lawyer is that he will put the manager’s interests ahead of those of the artist. That which is in an artist’s best interest is not necessarily what will best suit the manager.

For example, an artist may have been on a manager’s books for a while and in whom the manager has invested time and resource. After months of failing to land interest, a record deal is proposed on less than wonderful terms with a less than suitable label. If the advance and other benefits on offer will render sufficient commission and enough to payoff expenses incurred, the manager may be persuaded to accept the deal. The lawyer, who may have no real in depth relationship with the artist, may be none the wiser as to either the detailed financial dynamics operating between his two clients, nor even the artist’s creative motivation. Finding himself negotiating the artist’s deal on the manager’s instructions, the lawyer is stepping into an area where he may not only be acting in a conflict but even negligently as well.

As a matter of course, a manager’s lawyer should refuse to act for an artist in such situations. Even the independent artist’s lawyer who takes his initial instructions from and then liaises with the manager needs to take clearly visible steps to ensure that the artist both understands and approves of the contracts negotiated before they are signed.

Lawyers as managers

Of even more concern than representing both manager and artist on the same record deal, is the lawyer who is also the artist’s manager, particularly in circumstances such as those contemplated in the previous paragraph. With no independent lawyer on the scene, a lawyer/manager is performing the equivalent of the fee functions – manager, manager’s lawyer and aitist’s Iawyer.

The ability of a lawyer/manager to lose perspective as well as to fall prey to the blatantly obvious conflicts that arise is unlikely to be sufficiently addressed in practical terms by the simple expedient of securing informed written consent from the artist, as discussed below. At even greater risk, is the lawyer or lawyer/ manager – who also acts as the artist’s publisher or even production company. These various activities should each be conducted using separately constituted corporate entities with the monies generated by each activity kept totally separately. Additionally, if for example, a lawyer is acting as publisher, then, in any event, it will be critical for the lawyer to ensure that artist secures separate legal representation in relation to the publishing deal and any sub-publishing or significant licensing deals that arise thereafter. Better still, provided it works commercially, is for the artist to secure a publishing deal with an independent publisher.

How to keep the members of the Artist’s team separate – or how may conflicts be avoided?

A practical prescription for the issue of conflict is to be found in the Code of Conduct of MMF Australia 6 which, at paragraph 17, provides:

“Where a manager acts as publisher, agent, record producer or in any other capacity as well as a manager for his, her, or their clients, they shall declare such interests so that the artist has the ability to determine for themselves if they feel it constitutes a conflict of interest”.

Although the Australian code has no statutory force, an artist entering into an agreement with a member of the Australian MMF may arguably assert that the provisions of the code are implied terms of the management agreement, even if not expressly provided. The obligation to declare a conflict – or even the possibility of a conflict – is standard practice for lawyers. Conflict waivers may be obtained in certain situations. For example the rules of the New York Bar provide 7 that:

“notwithstanding the existence of a concurrent conflict of interest …a lawyer may represent a client if:

the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; and

the representation is not prohibited by law; and

the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

each affected client gives informed consent, confirmed in writing.”

The requirement for informed written consent to enable a conflict to be waived is often found in statutory codes and legal guidance. 8 The extent of formality required for such a waiver may vary from one territory to another. 9 The principles behind these formal conflict rules may be applied to other commercial and creative relationships, whether in the music industry or elsewhere.

More simply stated, once the possibility of a conflict arises, and the examples quoted in this chapter are by no means intended to be a comprehensive list, those faced with a conflict, even the potential for a conflict, must act efficiently to minimize its effect. In the event that a withdrawal from the situation is not possible, full disclosure must be made to those who are affected in order that they each might consider their respective positions and take independent advice as appropriate.

In an ideal world, the type of conflict anticipated by the Australian rule quoted above would never arise. However, the world is not ideal and the exigencies of the music industry inevitably mean that record companies have captive publishers, artist managers also manage producers with whom they might want their artists to work, agents may represent artists competing for top billing at the same festival and lawyers are asked to act for both the artist and his manager. In other words the possibility of conflict at some point in or around an artist’s firmament is almost inevitable.

Where a conflict arises, it is always best for it to be faced head-on. Pretending that a conflict does not exist or, worse, trying to hide it from one or more of the parties so affected will almost certainly create more problems that those doing the hiding and pretending will have hoped to avoid. Where the possibility of a conflict arises at the outset of a relationship it is a relatively straightforward matter for the position to be explained. A manager suggesting to an artist that his album be produced by someone he also manages at a studio that he also owns for which the artist or his record company has agreed to pay can easily explain the conflicts to an artist who might then make an informed decision. Assuming the artist has an independent lawyer, objective advice might also be easily sought and an informed decision be taken as to the term on which the project may proceed or otherwise not proceed at all.

More difficult, however, is addressing the conflict that arises during the course of a relationship:’ the two factions of a band that decides to split with each claiming the manager’s undivided intention; the lawyer’s clients who face each other in a dispute. Taking sides generally doesn’t work unless the relationship with one party is demonstrably more enduring than the other. In any event, where confidential information about both parties is known to a lawyer a written waiver will not be enough to enable him to act without impunity. Arguably, the same principles should apply to non-regulated parties. Absent a code of conduct and even allowing for entire agreement or integration provisions in contracts, in many jurisdictions there are overriding duties of good faith and fair dealing implied into contracts and certain relationships implicitly create fiduciary obligations. This will particularly be the case where one party holds and/or manages the funds of another.

Nevertheless, even where there is a framework wIthin which conflicts may be addressed, the challenge may more often be in having those not trained as lawyers or accountants to recognize where a conflict arises and for them to understand that the courses of action they propose create legal – and ethical problems for them. In part this is a matter of commonsense, in part a matter of experience but it may also be addressed by the relevant training.

The lawyer’s role

With regulatory frameworks that include ethical gUidelines, professionals such as lawyers and accountants are well placed to ensure that, as far as possible, appropriate standards of behaviour apply amongst the artists’ team.

In examining the relationships in which an artist is operating, it is important, however, for a lawyer not to compromise his own ability to act independently even if the referral came from another member of the team. The situation of lawyers representing both manager and artist is one situation where the boundaries between interests become more than just blurred.

A lawyer should never be shy about pointing out to a client the possibility of a conflict arising in a commercial relationship in which the client is involved. The worst case arises when the client enquires subsequently as to why he was not told about a conflict by which he had been affected.

Lawyers may assume the role of safeguarding the interests of the artist in the vortex of conflicts that may otherwise arise. Wisdom and guidance are always appreciated by clients, even if after the event when they reluctantly wish that advice received and ignored had been followed.

Conflicts of Interest: Keeping the members of the Artist’s team separate’ is included in the book: ‘Building Your Artist’s Brand as a Business’ which is published by the International Association of Entertainment Lawyers’ and is available directly from Frukt Communications and maybe ordered online at: http://www.iael.org/publications/26/